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Microsoft Corp. Chairman and Chief Software Architect Bill Gates Wednesday ended three days of testimony on the witness stand with a warning that the remedies sought by the nonsettling states will take away Microsoft’s incentives to innovate and send his company’s multibillion-dollar research and development engine “into a 10-year period of hibernation.”

That warning was among the last bit of testimony from Gates before he left the witness stand, exiting the courtroom to wait for the end of the remedy phase and a decision from U.S. District Judge Colleen Kollar-Kotelly.

Gates, in a brief re-direct questioning from Microsoft attorney Daniel Webb, said the proposed remedies would have “some very dramatic effects on Microsoft” and other companies. He criticized the remedy for its ambiguities and for a “breadth of restrictions” so broad that it would lead the company to pull Windows from the market.

States’ attorney Steven Kuney finished his cross-examination late this afternoon, running long past the 90 minutes he had earlier predicted it would take. At one point, Gates had referred to their exchanges as “word fencing.”

Drawing his cross-examination to a close, Kuney turned attention back to the central drama in the 1998-99 antitrust trial: Microsoft’s impact on Netscape Communication Corp.’s Navigator.

In focusing on the states’ remedy plan to require Microsoft to make its Internet Explorer Web browser open source, Kuney went through the violations cited by the court of appeals that he claimed “contributed significantly” to Explorer’s dominant market position “at Navigator’s expense.”

Gates said that while he accepted what the court of appeals found, other key factors contributed to Netscape’s decline.

In earlier testimony, Gates and Kuney sparred energetically over Gates’ interpretation of the proposed remedies to the company’s anticompetitive behavior. With his questioning, Kuney was attempting to show that Gates is exaggerating the negative effects the remedies would have on Microsoft.

U.S. District Judge Colleen Kollar-Kotelly is being presented with proposed remedies from Microsoft and the nine states plus the District of Columbia still pursuing litigation against the company. The U.S. Department of Justice and nine other states agreed to a settlement with Microsoft last November; the holdout states want tougher and broader restrictions on the company’s business practices.

Yesterday morning, Kuney continued questioning Gates about his written direct testimony, in which he said that if the states’ remedies were imposed, Microsoft would be forced to pull Windows from the market or be in violation of the remedies. One of the states’ remedies would force the company to sell an “unbound” version of Windows — free from additional programs such as a Web browser or media player, referred to as middleware — that would be the functional equivalent of a version that includes middleware.

Kuney asked whether Microsoft could engineer Windows to still perform all of its functions except for playing media if the company removed the Windows Media Player from the operating system. Gates answered no, saying that the company would have to essentially recreate the Windows Media Player and include it in the operating system, which would be in violation of the states’ remedy. He made the analogy of pulling the heart out of a human body without causing degradation to the body’s functioning, but without putting the heart back in, either.

Kuney then asked Gates if Microsoft could create a version of Windows without the Windows Media Player that displayed a message every time Media Player functions were invoked, telling the user that the feature wasn’t included in their version of the operating system. Yes, said Gates. But every time that message popped up, it would degrade the system’s performance, violating the states’ remedy.

Kuney moved on to the topic of Windows XP Embedded, a version of the operating system designed for use in dedicated devices such as cash registers and medical implements. He attempted to show that Microsoft has already built a version of Windows that can use some, all, or none of its middleware.

Through his questioning, Kuney showed that Windows XP Embedded is designed to let users select which middleware elements they want included in the operating system. For example, he showed a screenshot describing Windows XP Embedded with six versions of Internet Explorer from which to choose. Users of the embedded operating system choose which components they want, and other components required to make the users’ options function are automatically installed, Gates said.

Kuney asked if a user could create a version of Windows XP Embedded for the PC that ran all the same applications as Windows XP. No, answered Gates, because the embedded version doesn’t include an installer, so no new software could be put on the PC running Windows XP Embedded. In addition, Microsoft’s licensing of Windows XP Embedded doesn’t allow for distribution of the operating system running on a PC, Gates said.

Moving to the topic of Windows’ fragmentation — another potential result of the states’ remedies, according to Gates — Kuney asked whether the operating system is already fragmented because Microsoft updated the desktop in Windows XP, making it different from earlier versions. Kuney asked if users have to go through a learning period every time they update Windows. Yes, said Gates, “but you don’t have to go take a course.” Gates added that these were only changes in the user interface, not in the platform which software developers deal.

The states’ lawyer asked Gates to turn his attention to the states’ provision regarding porting the Office suite. “It’s called porting, but it’s giving away,” Gates said, drawing laughter from the courtroom. Kuney asked why Gates claimed the states’ provision forcing it to continue developing Office for the Macintosh would be burdensome, since it’s a product the company already updates. The provision calls for Microsoft to release the same number of Office versions for the Mac as it does for Windows, and with consistent features, which isn’t something the company does now, Gates said.

“Being required over a period of 10 years to do that work regardless of (the Macintosh market) with things we don’t do today, we find that a negative requirement,” he said.